Foreseeing a Threat and Opportunities Onwards
Higher Excise-Tax Eased Production Volume
As of 7M22, the national cigarette production dropped -4.50% YoY to 174.01bn sticks (vs 182.20bn sticks in 7M21), as we believe that the declined was on the back of greater-excise-tax by 12% this year. However, the state revenue from the tobacco excise tax in 7M22 jumped by +20.63% YoY (realization: 58.19%), which was backed by: 1) the effectiveness of excise-tax; 2) addition from FY21. Over the years, cigarette player struggled given the greater double-digits excise-tax since FY16, thus reducing their profits and margins. Despite its spurs, we see HMSP was winning the competition in adjusting its ASP as it can withstand its shrinking margin, while GGRM was quite unable to fulfill this as shown by a net loss in 2Q22.
Expect Cigarette-Excise-Tax 10% in FY23F
• The govt. targets excise-tax revenues of IDR245.4tn in FY23F, rising +9.46% from FY22E outlook (IDR224.2tn) and +20.35% from initial est. of 2022 state budgets.
• Based on our conservative models, to reach those figures, we estimated the govt. is likely to increase the weighted-average-excise-tax on cigarette by 10%, while SKM by +12.2%, SPM by +12.7% and SKT/SPT by +4.0% (exhibit 03).
• Moreover, we also projected that HJE will follow an increase in weighted-average-excise-tax of +8.5%, as the govt. had anticipated a predatory pricing with the assumption of HTP base rate of 85% or unchange.
Awaiting for Political Years in FY24F
• We expect the govt. will implement a populist policy regarding the increase of excise-tax in FY24F.
• In the past 3 political years, the govt. raised its excise-tax by 7% in FY09, and 0% in FY14 & FY19.
• We believe GGRM will be benefited as they have one of the biggest production of SKM cigarettes (~34% market share, we estimated).
• In FY14 & FY19, The GGRM’s average growth of revenue and net income reached 16.53%/31.48%,respectively.
Solid HMSP’s KLM Segments Amidst PMK 109 ’22 Supremacy
• As of July 4, the govt. implemented PMK 109 ’22 replacing PMK 1092 ‘21, which separates KLM (tobacco with rhubarb) into 2 classes tariffs.
• For class 1 with a total production of >4mn sticks/year will receive HJE and excise-tax per stick by IDR780/IDR440 ,and class 2 with a total production of <4mn sticks/year is IDR200/IDR25.
• HMSP with a total production of KLM segments reach 475mn sticks (in 1H22) will automatically receive a class 1 tariffs (equivalent with class 2 tariffs previously).
• We take into account and resulted the total amount including excise duty ribbons, VAT and cigarette tax for class 1 with 12 sticks/pack is IDR6,736 while class 2 is IDR842/pack.
• Based on our survey, the selling price in retail/traditional trade for HMSP’s KLM cigarettes has changed from IDR8,000/pack to IDR10,000/pack in Aug-22, or still delivered a margin of 33% from retail prices (exhibit 09).
Recommendation : Neutral for Tobacco
We transfer our coverage on Tobacco sector from Rifqi Ramadhan to Raka Junico. We recommend NEUTRAL for Tobacco Sector, largely by the possibility on an aggressive cigarette-excise-tax policy reaching double digits in FY23F and the faint chance to fully pass on to consumer. Hence, we maintain our call HOLD for HMSP IJ (TP: IDR950) and GGRM IJ (TP: IDR23,000). We are also waiting for the government's official plan regarding future excise-tax regulations which is mostly announced in 4Q. Nevertheless, HMSP has uphold its margins, driven by product diversification strategy and potential growth in the KLM segment. Meanwhile, GGRM will still be under pressure due to the decline in the SKM markets as tight competition with SKT such as “Juara” Cigarettes launched by KT&G (Korea Tobacco & Ginseng). Downside risk: 1) higher than expected excise tax hike; 2) lower than expected sales volume.
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